Not everyone can get a mortgage. Even if they can afford it, some buyers don’t qualify for financing due to a past bankruptcy or non-traditional sources of income. Even reasonably well-off people can be turned down for a mortgage when they rely on investment income.
Sometimes a property isn’t lend-able either, or it’s hard to sell, or the seller doesn’t want to take a full payoff of the property yet.
In these cases, seller financing (also called a land contract) can be an option. This is where a seller agrees to accept monthly payments directly from the buyer, bypassing any bank financing.
For sellers, the downsides would be not getting all their cash up front, and risking the possibility of having to remove a non-paying buyer from the property.
For buyers, it’s a risk to simply hand money to the seller each month. Imagine this scenario:
There’s a rural property with a small mobile home on it. It’s been difficult to find a buyer, so the seller lists it with ‘seller financing available.’ A couple who went through bankruptcy wants to buy it to start over. The couple pays the seller for a few years. Then one day authorities show up and tell them to vacate the property, that it’s been foreclosed on. Turns out the seller became ill and his family stopped paying the mortgage and just pocketed the payments. The nice couple is out several years of payments with no recourse, since the mortgage was in first position.
Much of this can be avoided by taking proper steps. Buyers should hire a title company to research the property’s history and records to search for underlying loans or other red flags. Both sides should create a legitimate, notarized contract. For details about how to set up a land contract correctly, see this article from Forbes.